Tax strategy: Working in another province can cause tax pain here

If the difference in provincial taxes exceeds $1,800 when you work out of province, prepare to pay instalments.

Paul Delean, Montreal Gazette

Updated: May 18, 2015

For freelance work or self-employment, there is no limitation on the amount of expenses incurred or a requirement that you show a profit. Canada Revenue Agency's only stipulations are that expenses be "reasonable" and carried out with a "reasonable expectation of profit." Sean Kilpatrick / THE CANADIAN PRESS

The rules for taxation while out of province and the division of rental income by multiple owners were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.

Q: “I am a Quebec resident who in 2013-14 worked in another province. My office deducted federal and provincial taxes from my salary. When I filed my federal tax return, Ottawa reimbursed me for the taxes taken off in the other province and I paid Quebec tax separately. Revenue Quebec says that, as a Quebec resident, I should have paid tax here in instalments and has levied interest charges. In other words, I should have been paying provincial taxes in two provinces at the same time, on the same earnings. Is that fair?”

A: Fair or not, that’s the way it is if the difference in provincial taxes exceeds $1,800. There was even a court case in 2013 upholding the status quo. Nick Moraitis, partner at accounting firm Fuller Landau, says there are a couple of ways to make it less painful. You could request that an out-of-province employer deduct Quebec income taxes (which may be possible if the employer has a payroll office in Quebec). You could also make a request on your federal tax return (line 438) to transfer to Quebec as much as 45 per cent of the income tax deducted at source from your paycheque. “This tax transfer reduces the taxes reported as ‘paid’ on the federal return and increases the taxes considered ‘paid’ on the Quebec return, reducing what is owed to Quebec.” That can help because if you owe Quebec more than $1,800 in taxes for two straight years when you complete your provincial return, you’ll be subject to quarterly instalment payments.

Q: “I bought the family cottage from my mother about five years ago for $60,000. I’ve decided to tear it down and build a new one, at an estimated cost of $100,000. It’s for personal-use only. Will my cost be $160,000 for capital-gains purposes if I sell in the future?”

A: Accounting professionals that we consulted said yes, although Canada Revenue Agency’s official position is that questions of this nature are “case-specific.”

Q: “If you have rental revenue and there are three co-owners of a property, is it possible to have one owner declare all the income?”

A: As tempting as it may be from a tax standpoint to have the lowest earner declare the full amount, it’s supposed to be reported by each co-owner in proportion to his or her ownership stake.

Q: “Forty years ago, we bought a cottage in the Ste-Agathe area for $5,000. We had it winterized and added an extra bedroom but didn’t keep any receipts. The property is now evaluated by the municipality at $88,000 and we are thinking of selling. Is the capital gain calculated on the original price even though there was a major renovation?”

A: You’ll be able to include an amount for the winterization expense in your “adjusted cost base,” even without receipts. The key is to be reasonable and truthful in your estimate to avoid any flags being raised should Canada Revenue Agency choose to review the claims.

The Montreal Gazette invites reader questions on tax, investment and personal-finance matters. If you have a query you’d like addressed, please send it to Paul Delean, Montreal Gazette Business Section, Suite 200, 1010 Ste-Catherine St. W., Montreal, QC, H3B 5L1, or by email to pdelean@montrealgazette.com

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